Featured in SRPInsight, Stefan Wagner, Head of Business Development at vestr, speaks about structured products and actively managed certificates (AMCs).
SRP spoke to Stefan Wagner, the company’s head of business development, about the appeal of AMCs and defined outcome structured funds. As well as autocalls, trends and themes in the structured products market.
According to Wagner, the fact that many issuers of AMCs have adopted the firm’s platform suggests this is an area of growth in the market.
“These structured products can be listed or are one-off OTC trades,” he said. “Several structured product houses focus on offering structured products inside AMCs – many of their AMCs use structured products as part of the underlying portfolio.”
The AMC is also often used to provide access to assets that are difficult to access.
For example, strategies on cryptocurrencies and providing liquidity for mining or staking.
“Overall Decentralised Finance is of interest to AMC investors,” said Wagner. “Institutional investors like to use AMCs to access crypto [and other digital assets] instead of opening up a wallet.”
Most of the activity around AMCs continues to come from external asset managers that already have used structured products before. However, issuers also deploy this wrapper seeking to leverage their existing capabilities.
“Many structured products issuers already do AMC business because, for them, it’s an easy way of diversifying their offering and leveraging their knowledge,” said Wagner.
“They have done delta one and have an existing issuance vehicle, so it’s pretty easy for them to get into the AMC business.”
The market growth also comes from new securitisation vehicles or special purpose vehicles (SPVs) set up to enable AMC issuances but also a whole range of investment vehicles, from Ucits to limited partnerships.
“For the bulk AMCs, between US$1 to US$50 million, it is not worthwhile setting up a fund,” said Wagner. “But we also see other issuers who have US$100 million in one AMC – these are often from big players with a successful strategy with an internal distribution, plus they can offer investments that take too long to implement in a fund.
“Many themed investments are done via AMCs. Because, by the time the fund is up and running, the investment rationale for the theme has already been realised.”
Most of the AMC activity seems to come from Switzerland, but there are other jurisdictions where AMCs are also popular, like Luxembourg and Liechtenstein. Where is the issuance and investing coming from?
Stefan Wagner: There are always three parties involved in an AMC – the issuer, the external asset manager and the investor. All three parts can be in a different region.
From a booking point of view, Switzerland and Singapore
are probably the biggest markets for AMCs in the world. That comes from the fact that people outside that country often use them to book and manage their wealth and because they both have a diversified external asset manager market.
For example, a Latin American client might have an account at a bank in Geneva. The AMC booked in the Geneva account
is advised by an external asset manager located in Germany, and the issuer is incorporated in the UK. The same applies to Singapore, one of the biggest markets where AMCs are booked.
Historically, many issuers are from Switzerland, but several European or US issuers have also been very active with AMCs in Europe. Then you have many smaller firms that use off-balance- sheet vehicles domiciled in Guernsey, Jersey, and Luxembourg.
How do you see defined outcome products or funds of structured products? Do they fit with the AMC approach?
Stefan Wagner: With a defined outcome, you know exactly what your payoff will be depending on where the market ends up. That’s what the derivative does. It is an attractive proposition because the people who sell it don’t need to have a long track record, and it is obvious what they receive as an investor.
If the investor likes the risk profile, then it is the right product for them. You cannot argue that you picked the wrong stock, or ‘why did you buy Netflix when it was already up 200%?’ None of this goes into it. It’s a very clear relationship between the investment manager and the investor, and the investment is fully transparent.
Derivatives are not a zero-sum game. If one side delta hedges, usually the investment bank, and the other side doesn’t, which is what the investors typically do. Both can make money, both can lose money, one can make money, and the other one can lose money. All iterations are possible.
Most of the payoffs in structured product funds are autocalls. Is there a scope for other types of payoffs too?
Stefan Wagner: You have to distinguish between what we
call predefined payouts. For the time being, they will mainly
be autocalls or anything that is a yield generating product. Nevertheless, many quantitative investment strategies use a broad range of listed options to implement a specific risk profile.
What is your assessment of the structured products market over the last 18 months?
Stefan Wagner: Post March 2020, we saw a lot of banks looking to change the payouts to mitigate and hedge their risk. That can be advantageous because pricing may become more attractive. They were hit by the change in dividend expectation, which led to new indices with fixed dividends embedded.
Correlation risk has also been on the agenda. Investors don’t like this, and they avoid worst-of and best-of structures. Same with the discontinuity that you often have with barriers. We have seen innovation on payoffs to mitigate correlation and discontinuity risk.
We also have explored equally weighted indices – sector exposure can be significant in capital weighted indices if a sector like technology had a run-up. Equally weighted indices have a broader diversification.
What is your investment theme for 2022?
Stefan Wagner: ESG is definitely a topic that’s coming. There’s increasing attention around it, and more and more money is invested in sustainable investments. There are already many good indices with ESG in mind developed.
Still, the question is, can we actually get a good ESG index that can be a reference and investment banks can actually hedge without proxies. I think that’s why we are a bit stuck right now. It will be exciting to see what solutions providers can come up with.
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